Politics motivates feel-good milk deal

The real incentive for Coles and Woolworths is the Australian Competition and Consumer Commission’s review into milk pricing and its concern about the duopoly’s enormous power over suppliers.
Photo: Geoff Caddick

Supermarket giant Coles is seeking to appease the competition regulator and win back kudos with customers and politicians by cutting out foreign-owned suppliers and sourcing milk directly from farmers.

In the biggest shake-up of the Australian dairy industry for years, Coles on Wednesday announced new milk supply contracts with dairy farmer co-operatives. It follows a similar initiative by
Woolworths
although there are marked differences in how the two rivals will have their milk processed.

The spin doctors at Coles are working overtime on this one. Farmers get a bigger share of the retail price, the foreign-owned middle man (Kirin-owned Lion) is sent packing, and milk prices are more affordable for consumers.

The real incentive for Coles and Woolworths is the Australian Competition and Consumer Commission’s review into milk pricing. Even though food prices are falling, the enormous power that Australia’s two supermarket giants have over their suppliers is also firmly in the ACCC’s sights.

Milk and home brands have been at the centre of the public debate surrounding the Australian supermarket duopoly and the new contracts announced on Wednesday are designed to stave off criticism that its cheap home brand milk is undermining the dairy industry.

It also opens up the industry by adding new players such as Devondale and Norco to the picture, a pre-emptive move designed to appease the ACCC’s milk inquiry.

Despite the cynicism around their motives, it is in fact good news for dairy farmers who do not have it easy at the moment. The new supply agreement between Coles and Devondale (Murray Goulburn Cooperative Co) lasts for 10 years. It signals a return by Devondale back into the daily pasteurised milk market. The agreement with the Lismore-based Norco Co-operative is for five years.

There will be a premium locked into the milk price paid by Coles which should go back to dairy farmers.

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Despite cutting out the middle man, someone still needs to process the milk. Devondale will invest $120 million to build two milk-processing plants in Melbourne and Sydney. This is a significant investment and it is unclear when they will get a return on that investment.

Wesfarmers
-owned Coles and Woolworths are seeking to enter into a code of conduct with the Australia Food and Grocery Council. If that fails, they could face a mandatory code being imposed by the federal government.

Woolworths is also looking to buy milk directly from farmers. The rival’s “Farmers Own" brand would be produced with a group of NSW farmers and processor Parmalat in a deal announced at Easter.

The big loser is Lion, which in February reported a 10 per cent decline in its Dairy & Drinks business revenues because of milk private label contract losses and reduced branded milk sales.